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Did Costco lose $27 billion from a tweet?
PLUS: How does Costco keep its hot dog combo at $1.50.
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Today, we’re talking about Costco’s $1.50 hot dog combo. A parody Twitter account joked that Costco was increasing its price on this bundle and all hell broke loose.
Also this week:
Costco’s hot dog, explained
@Wendys responds to me
Links + Memes
Since 1984, the Costco hot dog and pop combo has cost $1.50. Based on inflation over the past 38 years, the price of that combo should be $4.03 (on top of the fact that the hot dog’s weight is up to a quarter pound).
The first Costco hot dog vendor was literally a hot dog stand inside one of its stores. And the retailer has gone to great lengths to keep that price point, which is an icon of American consumerism. It’s also the source material for the greatest headline in the history of corporate America.
On Wednesday, a parody Twitter account tweeted this out: ***BREAKING — COSTCO ANNOUNCES PLANS TO RAISE FOOD COURT HOT-DOG PRICES BY $1 DUE TO INFLATION
At first, the headline looked legit. But based on the amount of sh**posting I do, I’m a skeptical dude. So, I Googled to see if it was true. Nothing came up.
I took a closer look at the original Twitter handle and realized it was the hilarious parody account, @JohnWRichKid, who impersonates a Wendy’s fry cook. It was clearly a joke (Rich Kid is a parody of another parody account, which makes it even funnier).
Well, keep the last paragraph in mind when I tell you that the official US Republican Twitter account shared the “news” of the Costco price hike as a way to criticize the rising consumer inflation under President Joe Biden (#Bideninflation).
To be sure, the Biden administration has not handled inflation messaging well.
Last year, it repeatedly called inflation “transitory” and tried to assuage citizens by saying that the price of a July 4th cookout — with a completely random spread of food — was down $0.16 vs. the previous year. Fast forward to May 2022 and the most recent inflation print shows an increase of 8% YoY.
But, c’mon! It’s internet research 101. You have to Google the “breaking news” to verify if it’s true. It wasn’t just @HouseGOP, either.
Many blue checks got got:
There were suggestions that the specter of a Costco price hike on its hot dog combo was a catalyst behind the stock’s 12% decline on the day (which wiped ~$27B off of its market value).
I’m all for meme accounts moving markets and do believe a Costco price hike on its hot dog would cause hell to freeze over.
But if there’s one thing I remember from the CFA program, it’s that you have to separate out the move of a single stock relative to the market (beta vs. alpha). And the entire consumer sector puked on Wednesday following poor earnings from:
Target, which fell 25% (market cap lost $27B)
Walmart, which fell 7% (market cap lost $25B)
Each retailer reported different pain points: $WMT said that inflation was hitting its budget-conscious consumers while $TGT said it overstocked on big-ticket items (TVs, kitchen appliances) during the pandemic and the inventory overhang hurt its margins.
The entire Consumer Staples ETF (XLP) was down more than 6%, worse than any single day during the Great Financial Crisis. This was scary: the entire point of Consumer Staples stocks — Costco, Walmart, Pepsi, Coca-Cola, Proctor & Gamble, Phillip Morris, Colgate, Kraft etc — is that they hold up when we enter recession territory (translation: people will keep smoking, eating $1 hot dogs and buying toothpaste when the economy hits the doo doo).
It was very ugly out there. And blaming Costco’s 12% drop on a parody account that pretends to be a Wendy’s fry cook is probably a stretch.
I asked @JohnWRichKid for background on the prank and he wrote back:
“LMAO. Like any post I have on my parody account, I just randomly decided to do it today. There was no rhyme or reason behind my timing or framing of the tweet. I had absolutely no idea the HouseGOP would fall for it, let alone Fox reporters and FXHedgers.
They had no idea it was from a fake Wendy’s fry cook on Twitter, even though if they did 2 seconds of research they would be able to see that.
Kind of showed what we already know – nobody verifies anything and just reads headlines. Sad state of our society!”
Costco’s hot dog, explained
The “I will kill you” hot dog story was told by Costco’s CEO Craig Jelinek at a luncheon in April 2018. Per 425 Business, Jelinek joined Costco in 1984 and worked his way to President and COO by 2010. Two years later, he replaced co-founder Jim Sinegal to become CEO.
Here’s Jelinek breaking down the mythical tale:
“I came to (Jim Sinegal) once and I said, ‘Jim, we can’t sell this hot dog for a $1.50. We are losing our rear ends.’ And he said, ‘If you raise the effing hot dog, I will kill you. Figure it out.’ That’s all I really needed. By the way, if you raised (the price) to $1.75, it would not be that big of a deal. People would still buy (it). But it’s the mindset that when you think of Costco, you think of the $1.50 hot dog (and soda).”
A popular theory on the $1.50 combo is that it’s the “last” thing you see when you leave a Costco. The low price seers into your brain the incredible value offered by a Costco membership.
Others believe its a “loss-leader” for Costco, but this is incorrect. In a 2009 interview, Sinegal told the Seattle Times that Costco doesn’t “engage in loss leaders” and “the only time we sell below cost is when we’ve made a mistake and have to mark it down”.
However, Costco does cap its margin at 14% and drives many products to near break-even. Here’s how it manages costs on its most iconic deals:
Hot dog: Costco sells 130m+ hot dogs a year (more than all MLB teams combined). To keep the combo at $1.50, Costco has taken a number of measures: 1) it dropped leading suppliers (Hebrew National, Nathan’s); 2) in 2009, it built its own hot dog manufacturing plant in LA (and has a second one in Chicago); 3) it removed onions and sauerkrauts as free condiments; 4) it dropped Polish sausages; and 5) the pop was swapped from a can to refillable fountain soda.
Rotisserie chicken: Costco sells 100m+ of these chickens a year (at $4.99 a bird). A few years back Costco’s CFO said that the retailer loses $30-40m a year of gross profit by keeping its price low. Many took it to mean they sold chicken at a loss. This is a wrong reading. The CFO was saying that if Costco raised chicken price to the market rate, it could make an extra $30-40m a year (but was otherwise forgoing it). Either way, Costco spent $450m on a chicken plant in Nebraska to fill its its demand for rotisseries.
A thread from the r/Costco subreddit — which is full of Costco employees — talks about what constitutes a “loss leader”. Some non-employees argue that while the actual hot dog itself may not be sold at a loss, Costco loses money when you factor in labor. The counter-argument is that it’s impossible to tease out hot-dog specific labor costs because Costco reports the entire food court as one category (also, hot dog labor is pretty straightforward: take a tong to steam the buns and dogs).
The entire food court does $1B+ a year and I bet there’s some good margin on that fresh Chicken Bake.
Back to Sinegal: he loves the customer reaction when they see the hot dog combo price:
“People look at that hot dog and say $1.50, this is unbelievable. It’s the same thing you’d spend $7 or $8 at the ballpark for and not get the same quality dog. It’s one of the things that we’re known for. We’re known for that hot dog. That’s something you don’t mess with.”
While the “I will kill you” quip gets all the headlines, I think this exchange Sinegal has with the Seattle Times is just as memorable:
Seattle Times: “If that price ever goes up, what will it mean?”
Sinegal: “That I’m dead.”
What a legend.
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Links + Memes
@Wendys: Let’s take this email full circle. Wendy’s probably has the best corporate Twitter account. Whoever runs it is roasting people left, right and centre. I @-mentioned the account semi-frequently because…well, I love Wendy’s. My go-to order is one Spicy Chicken Burger and one Junior Bacon Cheeseburger (JBC).
Last week, the Wendy’s account finally responded.
TLDR: crypto has been selling off hard and someone created a “Wendy’s job posting” for crypto traders that are looking for work. It’s been so wild in 2022 that I assigned a single-digit % probability it was a real posting. But — per internet research 101 — I had to do research and ask the source:
Stablecoin meltdown: Speaking of crypto, the big recent news for the industry was the Terra UST stablecoin losing its $1 peg. My latest piece for Bloomberg explains the shenanigans: TerraUSD’s Crash Won’t Kill Dreams of an Algorithmic Stablecoin.
Pros of cons of being a content creator: Jason Pargin with a great breakdown on what it takes to be an online creator. He makes 10 solid points including:
“First, Answer This Question: Why Am I Doing This?”
“Know That You Will Sometimes Be Used As A Receptacle For Strangers’ Rage”
“Remember That Other Creators Are Not Your Enemy”
Are mafia film scenes real? Very entertaining 13-minute video that asks a former mobster if scenes from mob films like Donnie Brasco, Casino and The Godfather are real. Apparently, there’s no way a mobster would ever visit a psychiatrist (eg. the entire premise of The Sopranos). The phrase fuggedaboutit (“forget about it”) is very very accurate. And Joe Pesci “is the best portrayer of a mob guy”.
And here some memes: